Toy Story: How Wall Street Tries to Play You for a Fool

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Today, I have a toy story for you.

It isn't a story about toys. Well, it is, but that part is tangential. This is a story about how Wall Street toys with you. And I use the term loosely. Because Wall Street is playing with your money. For the Street, it is a game. And its goal, just like the croupiers at Vegas casinos, is to keep you playing on the other side of its trades. Never forget. The Street is the dealer, and you are the mark.

So here's a story that I noticed just the other day that shows just how Wall Street toys with your emotions to keep you in the game and skim you as it distributes its inventory, its "stock in trade," to you.

It almost fooled me, too. But fortunately, I have seen its games before, and that experience along with my computer program made me a little too smart for the Street.

My Trading System Showed Me the Truth About MAT... Before Wall Street Stepped In

I noticed this story because it happened to a stock I had just added to my Daily Trades List on Tuesday, Oct. 24. That list is part of my Wall Street Examiner Pro Trader Market Updates.

Every day after the market closes, I run an algorithm that I wrote to screen 4,500 listed U.S. stocks for chart setups that look good for swing trades of three weeks to three months, both on the long side and the short side. That screen spits out anywhere from 20 to 50 charts every day that I then eyeball for the best-looking setups. I choose those that pass my eyeball test to be added to the list, either long or short.

In addition, I review the charts of all the stocks already on the list. On Monday, there were 30 - 14 longs and 16 shorts (which tells us that this is no longer a one-way market). As a result of that daily review, I adjust some stops or change some positions to "sell" or "buy to cover."

One of the stocks that popped up on my screen on Oct. 23 was toymaker Mattel Inc. (Nasdaq: MAT). That was a couple of days before its quarterly earnings call, which was horrendous. Now, this stock has been going to hell in a handbasket for years, but it had been trading dead in the water for weeks around $15 and a fraction. Very quiet.

Below you see one of my proprietary cycle charts. It looked like this on that day.

That evening, on Oct. 23, the algorithm generated a sell-short signal, and I liked what I saw, so I added it to our Daily Trades List as a short to be executed at 2 p.m. on Tuesday, Oct. 24. Here's how the list looked as published that morning.

So if you were tracking and following these trade suggestions, you read the update in the morning, and if you liked that idea, you set your online trading platform to short the stock at 2 p.m., or you entered it yourself at that time. At 2 p.m. that day, the price of Mattel was $15.36. That was our assumed order execution price.

Now, there are many ways that Wall Street manipulates us to do what's good for them, but probably bad for you. What happened next in this toy story was typical of how Wall Street manipulates you into saving it from its own stupid mistakes. Yes, as good as it is at skimming your capital for itself, it does really dumb things sometimes. But it has a bag of tricks to get you to help it out without you even suspecting that that's what is going on.

Here's what happened over the next few days.

First, the stock sat there around $15.50 through Thursday, Oct. 26. Then MAT had its earnings call and the slop hit the fan. So called "earnings" came in at $.09 per share against an expected $.57. But wait! There's more! Here's how MarketWatch put it in the after-hours on Thursday:

Mattel Inc. MAT, +0.69% shares tanked 20% late Thursday after the toymaker reported a surprise loss and plunging sales for the third quarter, blaming it on [the] Toys "R" Us bankruptcy, tighter retailer inventories, and "challenges" with its underperforming brands. Sales worldwide were down 13%, including a 22% decline in North American sales. The company also announced a cost-cutting plan and suspended dividend. Mattel said it lost $603 million, or $1.75 a share, in the quarter, versus a profit of $236 million, or 68 cents a share, in the year-ago period. Sales fell to $1.56 billion from $1.79 billion a year ago. Analysts polled by FactSet had expected earnings of 57 cents a share on sales of $1.8 billion. Among Mattel brands, sales of American Girl products fell 30%, while Fisher-Price sales fell 15%.

That speaks for itself. The stock closed at $15.37 on Thursday before the earnings call. It opened Friday at $12.89. "Woohoo!" said yours truly. Woohoo is a technical trading term used by short-term traders. It means "woohoo."

But alas, whenever you say woohoo, that's actually a warning sign that things are about to turn against you. In other words, "Fade your own emotions." Traders use the word "fade" to mean "go against that which seems obvious," like sell good news, or buy bad news.